May The Odds Be Ever In Your Favor

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Hi everyone, and welcome back to The Macro Compass!‘’I compile statistics on my traders. My best trader makes money only 63 percent of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better be sure your losses are as small as they can be, and that your winners are bigger.’’ – Steve Cohen.This is a hard truth to accept for many macro investors: we will be right only about 50-55% of the times.If your win rate is much higher than this, I suggest you extend the sample of trades you are analyzing or assess whether you are not trading macro but rather just selling optionality – short vol/option strategies have win rates as high as 90%+, but they wipe you out completely when you are wrong.In the last 10 years, I scored a 53% long-term win rate on my directional macro trades.Once I realized that and given that the year-end P&L formula can be written as follows:I knew I’d better make sure the size of my losses doesn’t get out of control.This can be achieved in two ways: sizing trades correctly and designing a system that lets your winners run.Here is what I go through for every tactical trade I set up:Points 1-3 keep my emotions in check and ground me to a more rational assessment of the trade.Points 4-6 are about implementation.A warning: short carry trades (and long options) are expensive to hold over time if nothing happens.A reminder: in very choppy markets, you can get quickly stopped out with linear trades even if your thesis proves to be correct – consider whether the market regime favors…